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How to calculate beta

Theme 1

1. Find a company stock that has at least 5 years of quarterly return data (60 data points). Determine what the company Beta is by running a regression, and compare your calculation with what the financial source is reporting for the Beta.

2. Is your calculation of Beta the same as what the financial source reports? If not, why could there be a difference?

Theme 2

1. For the company that you chose in Theme 1, see if you can find data that could be used to calculate a WACC for the company. Typically, this information can be found on the company's website (financial statements, etc.) and stock rating services. After you have calculated the WACC, share your work with your colleagues on the discussion forum. Describe how you collected the information (where you went to collect it), and how you actually calculated the WACC; show your work.

Theme 3

1. Describe some ideas for how you could go about calculating a discount rate if you weren't able to calculate a Beta.

2. Discuss the pros and cons to different methods and what would be appropriate for certain types of situations.

3. How would you work with a scenario that requires the valuation of a project in a Third-World country (assuming that the headquarters of the company is in the United States)? What things would you consider in the valuation process?

4. Choose two countries from the African and Asian continents. Discuss how you would value companies (or individual projects) across both. Would you value a project the same or differently? Describe the logic of your approach.

Solution Preview

Please see attached file.

Theme 1

1.
Find a company stock that has at least 5 years of quarterly return data (60 data points). Determine what the company Beta is by running a regression, and compare your calculation with what the financial source is reporting for the Beta.

The company chosen is Hershey and the data is monthly returns as per the message I gave you. The calculations are in attached excel file.

The calculated Beta= .021

Published betas:

Reuters .15
Google Finance .15
MSN Money .15
AOL Money & Finance .378

2.
Is your calculation of Beta the same as what the financial source reports? If not, why could there be a difference?

There is slight difference. This can be due to difference in the time period taken by us and the published data. Overall the Beta of Hershey is low.

Theme 2

1. For the company that you chose in Theme 1, see if you can find data that could be used to calculate a WACC for the company. Typically, this information can be found on the company's website (financial statements, etc.) and stock rating services. After you have calculated the WACC, share your work with your colleagues on the discussion forum. Describe how you collected the information (where you went to collect it), and how you actually calculated the WACC; show your work.

The cost of capital can also be viewed as the minimum rate of return required keeping investors satisfied. Thus it is used to know the rate of return expected by the investors.
Cost of capital (WACC) =
(Cost of Equity x Proportion of equity from capital)+ (Cost of debt x Proportion of debt from capital)+ (Cost of Preference share x Proportion of preference share from capital).
Equity includes retained earnings and the cost of R/E is taken at cost of equity. Cost of equity capital is the opportunity return from an investment with same risk as the company has. Cost of equity is usually defined with Capital asset pricing model (CAPM). The estimation of cost of debt is naturally more straightforward, since its cost is explicit. Cost of debt includes also the tax shield due to tax allowance on interest expenses. In case of preference shares, the dividend rate can be taken as the cost since it is the amount, which the company intends paying against preference shares. As is the case of debt the issue expenses or discount/premium on issue has also to be taken into account.
Thus cost of capital is used to evaluate the project. It is also know as discount rate.

A firm's WACC is the overall required return on the firm as a ...

Solution Summary

This solution provides a detailed explanation on how to calculate beta.

$2.19